Marked increase in use of import-restricting trade “remedies” during the crisis

Crisis pushes up trade costs, making aid for trade facilitation more urgent than ever

Export promotion policies need to be carefully designed

December 4, 2009—According to the OECD’s latest outlook, world trade, which suffered a historic contraction in 2009 of about 12.5 percent from 2008, appears to be set for a modest recovery. The OECD projects that world trade will grow 6 percent in 2010.

However, trade, which soared during the boom, remains depressed and short of pre-recession levels. This week, WTO ministers agreed in Geneva that rapidly concluding the Doha Round of multilateral trade negotiations—which began in Qatar in 2001—would help the global economy recover from the crisis and developing countries to alleviate poverty.

Bernard Hoekman, Will Martin, and Aaditya Mattoo of the World Bank noted earlier this month in a working paper that the Doha Round must be concluded not because it will produce dramatic liberalization but because it will create greater security of market access.

This would strengthen, symbolically and substantively, the WTO’s valuable role in restraining protectionism in the current downturn. Doha would also create some new market access. For example, tariffs on Bangladesh’s exports of tennis shoes to the U.S would decline from 32 to 6 percent. The resulting boost in global real income is estimated to be as much as $160 billion.

Further, as some ministers also noted in Geneva, a Doha deal would create space for multilateral cooperation on key issues outside the Doha Agenda, including on the scope for trade policy actions related to climate change mitigation. This is highly relevant given the Copenhagen climate negotiations currently in the news.

A wealth of other World Bank trade research sheds light on key aspects of the global recovery and on trade’s intersection with other pressing economic issues. What follows is a selection of findings and trends that cover climate change and trade policy; export growth and export promotion policy; and protectionism.

Reconciling climate change and trade policy

Important trade issues are surfacing as the push to limit carbon emissions and fund adaptation and mitigation gets underway in Copenhagen. For instance, concern is growing over the likely impact of carbon-related border taxes and their optimal design.

If countries cut emissions by different amounts, carbon prices will vary too. Countries with higher carbon prices may seek to impose additional border taxes on imports from countries with lower carbon prices—to help their domestic firms stay competitive, and to reduce the “leakage” of carbon emissions through increased production where carbon is cheap.

In a new working paper, Aaditya Mattoo, Arvind Subramanian (of the Peterson Institute), Dominique van der Mensbrugghe, and Jianwu He confirm that emissions cuts by rich countries will have minimum carbon leakage effects. However, their outputs and exports of carbon-intensive industries may decline, potentially creating pressure for protection.

The impact of border taxes on trade is dramatically different if they are based on the carbon content of imports rather than on the carbon content in domestic production. The authors conclude that the former, when applied to all merchandise imports, would address competitiveness and environmental concerns in rich countries but have serious consequences for trading partners. China’s manufacturing exports would fall by a fifth and those of all developing countries by 8 per cent.

However, border tax adjustment based on the carbon content in domestic production might be less seriously damaging. This is because domestic production in developed countries has lower carbon content than in developing countries, and would result in lower border taxes on imports. It is critical to note, however, that the first best outcome from a developing country trade perspective is to have no border taxes at all.

Trade “remedies” during the crisis

Most major WTO member countries respond to calls for additional protection from imports by resorting to a basic set of trade “remedy” policy instruments, which includes antidumping, safeguards, and antisubsidy policies.

In a September 2009 working paper, Chad Bown examined new data from the World Bank-sponsored Global Antidumping Database tracking the use of these remedies during the crisis. He found a marked increase in WTO members’ combined resort to these instruments in 2008 and early 2009, and observed that their use is increasingly affecting "South-South" trade between developing countries, with a special emphasis on exports from China.

However, the collective value of G-20 imports that were affected by import-restricting remedies during this period is small—less 0.45 percent of these economies’ total imports. Still, Bown’s analysis of case-level data shows a number of ways in which use of these remedies in the context of the global crisis may have welfare-distorting effects on economic activity. His findings are elaborated in an October 2009 trade policy note.

The crisis and the cost of trade

As the global economic crisis exacerbates trade costs through channels such as the higher cost of trade financing and the proliferation of trade-distorting policies, the opportunity costs of not enacting trade facilitation reforms has increased significantly.

Indeed, research shows that actions that facilitate trade—such as investing in trade-related infrastructure or quick “behind the border” steps such as standards harmonization and removing regulatory barriers to trade—can play a key role in reducing trade costs.

Simeon Djankov, Caroline Freund, and Cong S. Pham found in 2008 that an additional day’s delay in getting goods from the factory gate and onto the ship reduces trade by at least one percent. Celine Carrere, Jaime De Melo and John S. Wilson suggested in 2009 that distance to markets remains a major barrier for poor countries. An earlier article describes why trade costs matter to Sub-Saharan Africa.

It is clear that governments need more aid to carry out trade facilitation reform. A new working paper by Matthias Helbe, Catherine Mann and John S. Wilson shows that a 10 percent increase in such aid—targeted at regulatory reform alone—translates into an $8 billion increase in global trade. The rate of return to each dollar of this type of trade-related aid is about $700 in additional trade.

Designing export-promotion policies

It is widely accepted that exporting firms everywhere are significantly larger, more productive and capital-intensive, and pay better wages than non-exporting firms. Ana M. Fernandes and Alberto Isgut also find evidence from a study of manufacturing firms in Colombia that firms become more productive as a consequence of participating in export markets.

“Learning-by-exporting” tends to have strong benefits on total factor productivity, the authors find. The results also show that learning-by-exporting effects are absent for firms that discontinue exports, and are reduced for those that already have export experience. So export promotion policies need to be carefully designed, and further research is needed on the connection between export promotion policies and their resulting learning effects.

In related research, Daniel Lederman, Marcelo Olarreaga and Lucy Payton have investigated the effects of services provided by Export Promotion Agencies (EPAs) around the world, based on new survey data. Results suggest that on average they have a strong impact on exports. The evidence highlights the importance of EPAs in overcoming market access barriers abroad and in solving asymmetric information problems associated with exports of differentiated products.

This research also provides insights into what types of activities and institutional designs work best, and public-private partnerships appear to be quite effective. The data also suggest that there are strong diminishing returns to export-promotion expenditures, suggesting that as far as EPAs are concerned, small is beautiful.